Ethereum’s Struggles in 2024: VanEck Report Unveils Major Challenges

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As a seasoned crypto investor with a decade-long journey under my belt, I find VanEck’s August 2024 report both enlightening and concerning. Enlightening, because it offers valuable insights into the market trends and drivers; concerning, as it underscores the challenges faced by some of the most prominent players in this space, notably Ethereum.

In this write-up, we’ll initially discuss the main points from VanEck’s August 2024 edition of their “Crypto Monthly Recap.” Afterward, we’ll delve deeper into VanEck’s reasoning behind Ethereum (ETH) not keeping pace with other Layer 1 blockchains in terms of performance.

Key Highlights from VanEck’s August 2024 Report

In my analysis as a financial analyst, I observed that the broader cryptocurrency market experienced a challenging month in August 2024. Notably, Bitcoin (BTC) dipped by 11%, Ethereum (ETH) saw a more substantial decrease of 24%, and Solana (SOL) declined by 21%. Conversely, traditional markets such as the S&P 500 and Nasdaq posted gains of 2% and 1%, respectively.

According to VanEck, a significant event in the global economy linked to the yen carry trade is believed to have caused the sudden drop in the crypto market on August 5, with Bitcoin temporarily falling to $49k and Ethereum to $2.1k. Despite Bitcoin recovering to $58k by the end of the month, Ethereum stayed relatively unchanged around $2.5k. Additionally, VanEck mentioned that the volatility in Bitcoin increased by 48%, while Ethereum’s volatility went up by 52%, indicating a rise in market uncertainty.

The daily activity on blockchain saw a decrease, as per VanEck’s report, with a drop of 10% in the number of active users, a 12% decline in fees generated, and a 4% reduction in volumes for decentralized exchanges (DEX). Furthermore, VanEck pointed out the transfer of approximately 186,000 BTC to exchanges, which could be due to bankruptcy-related distributions or actions taken by U.S. and German authorities, putting additional pressure on selling.

One significant influence on the market, as per VanEck, was the tightening regulations in the U.S. The SEC’s Wells Notice to OpenSea, a prominent NFT platform, sparked concerns about ongoing regulatory scrutiny, especially if political shifts like a Trump presidency don’t materialize.

VanEck also reported controversy surrounding Wrapped Bitcoin (WBTC), particularly due to a new partnership between Bitgo and Justin Sun, which alarmed the crypto community. MakerDAO even passed a governance proposal to ban WBTC from being used as collateral for its DAI stablecoin. In response, Coinbase launched its own version of Wrapped Bitcoin (wbBTC).

With regards to Solana, VanEck observed a significant drop in price by around 21%, primarily due to fraudulent incidents associated with memecoins. Yet, Solana had some encouraging advancements too – the debut of two ETFs in Brazil and an increasing adoption of PayPal’s PYUSD stablecoin on its platform. However, VanEck points out that the 150 terabyte size of Solana’s blockchain presents a challenge since it makes storing and accessing historical data costly.

Finally, VanEck mentioned Polymarket, a decentralized platform for making predictions that saw an increase in attention in August thanks to its rising prominence in political prediction markets. However, there remain worries about the possibility of market manipulation.

Ethereum’s Struggles: VanEck’s Detailed Analysis

The VanEck report offers an in-depth analysis of Ethereum’s relatively poor performance compared to other leading blockchain platforms like Bitcoin and Solana. Since the onset of the 2023 bull market, Ethereum has only managed a return of 62%, whereas Bitcoin boasts a return of 138% and Solana an impressive 624%. The report suggests that Ethereum’s underperformance can be attributed to its scalability challenges and the emergence of more agile, efficient competitors.

As a crypto investor, I’ve noticed that the transaction speed of Ethereum, roughly 15 transactions per second (TPS), seems to lag behind newer blockchains such as Solana and Aptos, which can handle thousands of TPS. Furthermore, Ethereum’s sequential processing of transactions leads to congestion during peak demand periods, reducing its overall usefulness. This slower performance, as suggested by VanEck, might be compelling developers and projects to migrate towards more advanced blockchains.

VanEck noted that Ethereum’s share of blockchain transaction fees significantly decreased, going from 86% in 2022 to only 33% in 2024. Additionally, Ethereum’s dominance in the decentralized exchange (DEX) market has weakened, falling from 42% to 29%. Consequently, Ethereum is no longer considered the leading platform for speculative trading by VanEck, as other chains are making progress in this area.

Although Ethereum aims to resolve its scalability challenge by shifting transactions to Layer 2 blockchains (L2s), VanEck’s analysis suggests that this approach has introduced fresh complications. By diverting Ethereum’s transaction fees and other value-generating processes, the L2s are diminishing Ethereum’s earnings directly. The report highlighted that Ethereum’s proportion of its ecosystem’s total transaction fees (encompassing Ethereum and L2s) has decreased from 98% to 89% since 2022, underscoring the impact of L2s on Ethereum’s economic activity – essentially eating away at Ethereum’s share.

Additionally, VanEck noted that the EIP-4844 upgrade on Ethereum, which established a separate lane for L2 transactions, has significantly reduced transaction costs within the network, resulting in decreased revenue. In the past six months, VanEck noticed a 89% decline in Ethereum’s fees, a larger decrease than Bitcoin’s 13%, while Tron and Solana have experienced fee hikes of 125% and 114% respectively.

As an analyst, I’ve noticed that VanEck has brought attention to a significant development within the Ethereum ecosystem. New token types such as staking and re-staking tokens have amassed approximately 11% of Ethereum’s total value. These newcomers not only add to the competitive landscape but also divert value from Ethereum, potentially contributing to its suboptimal performance.

VanEck’s assessment offers an insightful perspective on Ethereum’s challenges, underscoring its bottlenecks in terms of scalability, rivalry with quicker blockchain networks, and the unexpected issues that arise when leaning heavily on Layer 2 alternatives.

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2024-09-06 11:06